The 5 Most Popular Small Cap Growth ETFs

Last week in The Juice, we made an introduction to an ETF that’s almost always among the five most searched across the entire Trackstar universe. And, as you can see in today’s Trackstar top five, the iShares Russell 2000 ETF (IWM) crushes all other small cap growth ETFs in terms of search interest. 

In The Most Popular ETF The Juice Never Talks About, we explained that small cap stocks might be about to have their day, particularly if the landscape shifts away — even a little — from tech stocks. 

If you think this will happen over the near- to longer-term, one way to play it is by going equal weight on the S&P 500, which you can do via the Invesco S&P 500 Equal Weight ETF (RSP). You can also buy small cap ETFs. 

Because, as we’ll show today, they tend to be less concentrated in tech than market cap-weighted, broad market and large cap ETFs. To illustrate this, we’re featuring IWM and a name that sort of gets buried in Trackstar, the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS), with a mere 26 searches over the last month. We’re using DGRS because we like Wisdom Tree, but also because it shows how you can diversify within a larger space. 

While we’re not advocating you buy either of these ETFs, they are up around 20% each over the last six months, relative to an 18% return for the SPDR S&P 500 ETF Trust (SPY) and 17% for the Invesco QQQ Trust (QQQ). So maybe the gap is closing and the playing field is getting a bit more level. 

Looking under the hood of these ETFs is instructive. Start with sector concentration. 

IWM’s portfolio has 17.3% concentration in industrial stocks, 16.1% in financials, 15.0% in healthcare and 14.8% in information technology. In SPY, for example, IT is the top sector at a whopping 29.4% concentration. Next on the list is financials at 13.1%. 

DGRS is even less reliant on IT. The tech sector is the ETF’s seventh largest concentration at 4.1%, behind consumer staples (5.7%), energy (6.9%), materials (7.2%), financials (17.9%), industrials (23.2%) and consumer discretionary (23.6%).

If you’re looking to diversify away from tech, specifically large cap tech, small cap ETFs like these ones could be the way to go. 

A glance at the top holdings in IWM and DGRS reinforces this point. 

While four of the top ten holdings in IWM, including the top two, are IT stocks, they’re not household names and the concerns are closer to equal weight: Super Micro Computer (SMCI) (1.6%), Microstrategy (MSTR) (0.7%), Onto Innovation (ONTO) (0.4%) and Fabrinet (FN) (0.3%). 

The third largest holding in IWM at 0.5% is Carvana (CVNA), which got crushed in 2022, but is up roughly 308% over the last six months and 1,014% over the last year. Outside of the top ten you’ll find names such as Sprouts Farmers Market (SFM), Abercrombie and Fitch (ANF) and Fluor Corp (FLR). Not an endorsement of any of these names (though, damn, we wish we had bought CVNA!), but an illustration of the breadth and exposure outside of tech in IWM. 

While we’ll only scratch the surface on DGRS, its second largest holding (and, again, hardly overweight at 2.0%, as the ETF is closer to equal weight) is Marriott Vacations Worldwide (VAC). That stock is on the rebound, approximately 31% over the last six months, but down more than 19% over the last year. 

The third largest holding in DGRS is Cohen & Steers Inc (CNS), an investment firm and fund company, which is up around 30% over both six and one year periods. 

DGRS only owns dividend payers. These two are representative of the quality. VAC’s yield is 3.1% on a $3.05 annual dividend. CNS yields 3.3% on a $2.36 annual payout and has a 15-year track record of increasing its dividend. 

The Bottom Line: Right to bottom line today. Maybe abruptly, but only because it’s clear. 

We talk a lot about diversification around here. But, due largely to market conditions in the last couple of years, that diversification has been centered around large cap stocks. And that’s really not a good approach to diversification over the long haul. 

As we’re seeing with tech and, in relation, large cap names stumbling a bit, you need smaller cap stocks in your portfolio as well as dividend payers across the entire universe. So it’s less about abandoning tech and other big names — that’s flat shortsighted and makes little sense — and more about evening out your exposure to the market if it’s a little uneven to begin with. And, for many of us, that might be the case, making now the perfect time to rebalance, which might include making some additions.

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